Deutsche Bundesbank exposes the lies of mainstream monetary theory

On one side of the Atlantic, it seems that central bankers understand the way the monetary system operates, while on the other side, central bankers are either not cognisant of how the system really works or choose to publish fake knowledge as a means to leverage political and/or ideological advantage. Yesterday, the Deutsche Bundesbank released their Monthly Report April 2017, which carried an article – Die Rolle von Banken, Nichtbanken und Zentralbank im Geldschöpfungsprozess (The Role of Banks, Non-banks and the central bank in the money-creation process). The article is only in German and provides an excellent overview of the way the system operates. We can compare that to coverage of the same topic by American central bankers, which choose to perpetuate the myths that students are taught in mainstream macroeconomic and monetary textbooks. Today’s blog will also help people who are struggling with the Modern Monetary Theory (MMT) claim that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency and the fact that private bank’s create money through loans. There is no contradiction. Remember that MMT prefers to concentrate on net financial assets in the currency of issue rather than ‘money’ because that focus allows the intrinsic nature of the currency monopoly to be understood.

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    Posted in Central banking, Economics | 9 Comments

    Blog goes on holiday today …

    Today is a public holiday (ANZAC Day) where we remember the efforts of our past generations who fought in wars. I am not very enamoured by the hype that surrounds these days – commercialisation reigns and the black/white nature of the narrative (we were good they were evil) obscures the reality of war and the political machinations that typically accompany it. In Australia’s case our involvement in several wars has been the product of unnecessary colonial master-servant type arrangements (us being the servant) and/or ridiculous alliances with the war mongering US. But the soldiers certainly did it tough and I have sympathy with that – and personal association with my parents. But for me, I am travelling a lot today and am taking the work time to continue working on the completion of our Modern Monetary Theory (MMT) textbook, which is now in its final stages (2 weeks away). I expect it to be published later this year now through Macmillan. I will post specific information when it is available. While I am working today, I am listening to this …
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      Posted in Admin, Music | 9 Comments

      German trade surpluses demonstrate the failure of the Eurozone

      The election of Donald Trump has stirred up the IMF and Germany, in particular. Trump’s trade advisor has claimed that Germany is manipulating the currency to maintain its competitiveness. A more general view is that the massive German external surplus is a reflection of a dysfunctional Eurozone, particularly the failed monetary policy stance of the ECB and the lack of a European-level (federal) fiscal policy capacity and willingness to expand domestic demand in the Member States. In fact, both views have credibility as I will explain. Last week (April 19, 2017), Eurostat released the latest trade data for the Eurozone – Euro area international trade in goods surplus €17.8 bn. It showed that Germany’s trade surplus continues to grow (it was 35.4 billion euros in January-February 2017, up 1.4 billion over the 12 months) in total. In 2016, Germany’s current account surplus was 8.6 per cent of GDP, which is obviously an outlier. What is required to redress this on-going dysfunction within the Eurozone would appear to be beyond the political mentality of the establishment polity in the Eurozone. And with Macron’s elevation to an almost certain Presidential victory in France, it is hard to see any dynamic for now emerging that will create change for the better. So as usual, the Eurozone muddles on – with a dysfunctional design architecture and an even more dysfunctional attitude to policy flexibility held by the powers to be. Germany is seriously responsible for a lot of this dysfunction.
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        Posted in Eurozone, US economy | 7 Comments

        The Weekend Quiz – April 22-23, 2017 – answers and discussion

        Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
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          Posted in Saturday quiz | 1 Comment

          The Weekend Quiz – April 22-23, 2017

          Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention or not to the blogs I post. See how you go with the following questions. Your results are only known to you and no records are retained.
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            Posted in Saturday quiz | 1 Comment

            MMT is what is, not what might be

            One of the things I have noted with regularity is that readers and other second-generation Modern Monetary Theory (MMT) bloggers often fall into the error which we might characterise as the “When we have MMT things will be different” syndrome. Or the “we need to change to MMT principles to make things better” syndrome. Thinking that MMT constitutes a regime change is incorrect and steers one away from the core issues. In this blog, I reflect on that syndrome and some other aspects of the development of ideas, which I hope will provide readers with a clearer picture of what the core (early) MMT developers (Mosler, Bell/Kelton, Wray, Mitchell, Tcherneva, Fullwiler) had in mind when we set out in the early 1990s to construct a better way of doing macroeconomics. The point is that while MMT constitutes a regime change in economic thinking within the academy it does not constitute a regime change in the way the monetary system operates. We need to separate the operational principles exposed by MMT academics from their ideological values to really come to terms with the fact that MMT is what is, not what might be.
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              Posted in Debriefing 101 | 41 Comments

              Subsidiarity – a European Union smokescreen to justify failure

              One of the various smokescreens that were erected by the European Commission and the bevy of economists that it either paid or were ideologically aligned to justify the design of the monetary union around the time of the Maastricht process was the concept of subsidiarity. In 1993, the Centre for Economic Policy Research (a European-based research confederation) published its Annual Report – Making Sense of Subsidiarity: How Much Centralization for Europe? – which attempted to justify (ex post) the decisions imported from the 1989 Delors Report into the Maastricht Treaty that eschewed the creation of a federal fiscal capacity. It was one of many reports at the time by pro-Maastricht economists that influenced the political process and pushed the European nations on their inevitable journey to the edge of the ‘plank’ – teetering on the edge of destruction and being saved only because the European Central Bank has violated the spirit of the restrictions that a misapplication of the subsidiarity principle had created. It is interesting to reflect on these earlier reports. We find that the important issues they ignored remain the central issues today and predicate against the monetary union ever being a success.
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                Posted in Eurozone | 14 Comments

                Portugal demonstrates the myopia of the Eurozone’s fiscal rules

                On March 24, 2017, the Portuguese government (via Instituto Nacional de Estatística or Statistics Portugal) sent Eurostat its – Excessive Deficit Procedure (1st Notification) – 2017 – which is part of the formal process of the EU surveillance on the fiscal policy outcomes for Member States. The data submitted to the EU showed that the Government had reduced its fiscal deficit from 4.4 per cent in 2015 to 2.1 per cent in 2016, thus bringing it within the Stability and Growth Pact rules (below 3 per cent). However its public debt to GDP ratio rose modestly over that time from 129 per cent to 130.4 per cent. The other stunning fact presented, which hasn’t received much attention in the media, was that government spending on gross fixed capital formation fell from 4,049.3 million euros in 2015 to 2,879.6 million euros in 2016, a 29 per cent decline. Further, real GDP growth has been positive for the several quarters now and this has boosted tax revenue. The popular press has been claiming this is a Keynesian miracle – spawning growth and cutting the fiscal deficit. There is some truth to the statement that the ‘Socialist’ government has reversed some of the worst austerity policies introduced by the previous right-wing government, acting as puppets of the Troika. But what has been going on in Portugal highlights the myopia inherent in the restrictive Eurozone fiscal rules, which promote very short-term behaviour on the part of the Member State governments. As Portugal is currently demonstrating, it is prepared (and is motivated by the fiscal rules) to sacrifice sustained prosperity for short-term appeasement of Brussels. Short-term growth can occur within limits at the expense of long-run potential.
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                  Posted in Eurozone | 4 Comments

                  Blog has gone on holiday

                  Today is a public holiday and we are in the final days of completing our manuscript for the next version of the Modern Monetary Theory (MMT) textbook (which is to be published by Macmillan later this year). So I am devoting work time today to that task and as a consequence my blog is taking a holiday. In keeping with the mood of the day, a little walk down to the surf is also likely. The photo is of my local beach (Nobbys).

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                    Posted in Admin | 2 Comments

                    The Weekend Quiz – April 15-16, 2017 – answers and discussion

                    Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
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                      Posted in Saturday quiz | 12 Comments